District of Nebraska excludes cost-savings apportionment model

The District of Nebraska, in Prism Technologies LLC v. AT&T Mobility, Civil Action No. 8:12-cv-00122-LES-TDT (Judge Lyle E. Strom) (September 22, 2014), granted a motion to exclude testimony from Prism's damages expert James Malackowski. As described by the Court:

Mr. Malackowski's model has multiple stages. First, he attempted to isolate the "economic footprint" of the invention in each defendant's revenues to create a royalty base in a three-step calculation. First, he identified each defendant's data services revenue. Second, he reduced the revenue of RIM subscribers per Prism's RIM agreement. Third, he "apportioned" these revenues by each defendant's cost savings fraction....The cost-savings fraction is a separate, two-step, calculation. Mr. Malackowski identified the numerator of this fraction as the cost savings value of the asserted patents (Filing No. 265-3, at 43-46).Then, Mr. Malackowski identified the denominator as the total network costs for each defendant (Id.). The resulting fraction represented the "benefit cost savings" of the infringing system.
From this royalty base, Mr. Malackowski applied a royalty rate that varied between 2-4%. The defendants took issue with this damages model on three main grounds, 1) that a revenue-based royalty was inappropriate as a matter of law, 2) that the "cost-savings" apportionment was flawed, and 3) the methodology was effectively a "black box" that could not be correlated with the invention's economic footprint.

On the first ground, defendant's argued that plaintiff's model violated EMVR, but the Court denied the motion since Mr. Malackowski had apportioned the total revenue by removing all revenue except for that associated with his calculated cost-savings. The Court also denied the third ground, finding that Malackowski's royalty rates were not analogous to the "25% rule of thumb" rejected in Uniloc.

On the second ground, however, the Court noted that the methodology was largely untested, since there were almost no cases either supporting or rejecting such a model: "Cost savings or revenue are a permissible form of calculating patent damages. However, the Court can find no case law to support Prism's claim that the product of revenue as a fraction of cost savings is permissible, let alone logical. Malackowski's model is the first of its kind in patent cases." It is unclear whether the Court used this as a separate ground to exclude the opinion, or rather as additional reasoning to bolster the decision to exclude.

The Court's main issue with the methodology was that it found the model did not sufficiently tie the patented invention to the cost-savings, and particularly the usage of total revenue: "It cannot be overstated that cost-savings analysis should not include the revenue figure as a matter of course." Although not said in so many words, it appears the Court believed more evidence should have been provided on the specific nexus between the patented invention and the cost-savings used, i.e., patented feature "x" led to cost-savings "y" because of reasons "a, b, and c."

The Court's Order stated that "Mr. Malackowski is prohibited from offering his opinion and testimony at trial in its entirety." Nothing is mentioned regarding whether the Court would allow a supplemental report prior to trial.

This case highlights the difficulty of applying rules such as EMVR, smallest saleable unit, apportionment, etc. in situations where the accused "product" is not a product in the usual sense, but rather a service or a feature of a website. Here, the accused features related to a telephone network, and it appears undisputed that there was some amount of cost-savings to the defendants because of the accused feature (putting aside whether the accused feature actually infringed). But calculating damages on that, or on the value of a feature on a website, or on other amorphous accused features where there is no particular revenue or profit directly attributable, is proving to be problematic, and will likely lead to other novel damages theories until one or more begin to receive general endorsement from the courts.